When small business owners and HR professionals ask, “Are retirement benefits required by law?”, the answer is not as straightforward as it may seem.

While federal law does not mandate private employers to provide retirement plans, various state regulations and industry-specific mandates can impose obligations.

Moreover, businesses that voluntarily offer retirement benefits must comply with strict federal laws like the Employee Retirement Income Security Act (ERISA).

In this guide, we’ll explore employer obligations, compliance pitfalls, and how businesses can navigate the evolving landscape of retirement benefits.

Understanding Retirement Benefits in the Workplace

Retirement benefits are financial plans that help employees save for life after work. These plans typically fall into two categories:

• Defined Benefit Plans – Traditional pensions where employers guarantee a fixed payout after retirement.

• Defined Contribution Plans – Plans like 401(k)s, where employees contribute a portion of their salary, often with employer matching.

According to the U.S. Bureau of Labor Statistics, as of 2023, only 15% of private-sector workers have access to a pension plan, while 67% have access to a defined contribution plan like a 401(k).

This shift reflects a growing trend of transferring retirement savings responsibility from employers to employees.

The Role of Employers in Providing Retirement Benefits

Why do employers offer retirement benefits, even when not legally required? The reasons include:

• Attracting and Retaining Talent – Companies with strong benefits packages tend to attract top talent and reduce turnover.

• Tax Incentives – Businesses offering retirement plans may qualify for tax deductions and credits.

• Long-Term Workforce Planning – Retirement benefits can encourage senior employees to retire on schedule, allowing for smoother succession planning.

401(k) plans are not just for large corporations. The SECURE Act of 2019 introduced three-year tax credits of up to $5,000 per year to help small businesses cover startup costs for new retirement plans.

Are Retirement Benefits Required by Law?

Federal Retirement Benefit Requirements

At the federal level, employers are not required to provide retirement plans, but if they do, they must comply with ERISA.

The Employee Retirement Income Security Act (ERISA)

Passed in 1974, ERISA sets minimum standards for retirement plans in the private sector. If a company offers a 401(k) or pension plan, it must:

• Disclose plan details to employees.

• Meet fiduciary responsibilities to manage the plan in employees’ best interests.

• Ensure vesting schedules that grant employees ownership of their benefits after a certain period.

Failure to comply with ERISA can result in steep penalties, with fines reaching $2,586 daily for late or missing plan filings.

Social Security Contributions

Although employers are not mandated to provide private retirement plans, they must contribute to Social Security.

The Federal Insurance Contributions Act (FICA) requires employers and employees to contribute 6.2% each toward Social Security, ensuring retirees receive some financial support.

State-Mandated Retirement Plans

Many states now require private employers to offer retirement savings programs.

As of 2024, over 15 states have enacted mandates, including:

• California (CalSavers)

• Illinois (Secure Choice)

• Oregon (OregonSaves)

These programs typically apply to businesses with a certain number of employees (often five or more) and require them to either offer a state-sponsored plan or establish their own 401(k).

Failing to comply can result in fines. For example, businesses that ignore the CalSavers requirement in California can face penalties of $250 per eligible employee, increasing to $500 per employee for continued non-compliance.

Industry-Specific Retirement Benefit Requirements

Some industries require retirement contributions as part of union agreements or government regulations.

For example:

• Public sector jobs (teachers, firefighters, government employees) often have mandatory pension systems.

• Construction and trade unions frequently negotiate employer-funded pension plans.

Businesses in these industries must carefully review collective bargaining agreements to ensure compliance.

Employer Options for Retirement Benefit Plans

Traditional Employer-Sponsored Plans

401(k) Plans

A 401(k) plan allows employees to contribute pre-tax income, with employers often matching contributions.

These plans:

• Offer tax advantages to businesses.

• Encourage employee retention.

• Require compliance with ERISA fiduciary responsibilities.

Defined Benefit Pension Plans

Although pensions are rare in the private sector, they remain a staple for government workers. Employers who offer them must:

• Fund the plan based on actuarial calculations.

• Ensure long-term sustainability.

• Comply with ERISA’s funding and reporting rules.

Alternative Retirement Savings Options

For small businesses hesitant about 401(k)s, alternative options exist:

• Simplified Employee Pension (SEP) IRAs – A tax-deferred retirement plan ideal for small businesses.

• Savings Incentive Match Plan for Employees (SIMPLE) IRAs – A low-cost retirement plan option requiring 3% employer matching.

• Non-Qualified Deferred Compensation Plans (NQDCs) – Typically used to reward executives without ERISA constraints.

Compliance and Legal Considerations for Employers

ERISA Compliance Guidelines

To avoid legal trouble, employers offering retirement benefits must:

• File Form 5500 annually with the Department of Labor.

• Provide Summary Plan Descriptions (SPDs) to employees.

• Adhere to fiduciary standards to protect employee savings.

Understanding the SECURE Act and Its Impact

The SECURE Act (2019, updated in 2022) made several changes, including:

• Increasing the required minimum distribution (RMD) age from 72 to 73.

• Allowing part-time employees to qualify for 401(k) plans after two years.

• Expanding tax credits for small businesses launching retirement plans.

Penalties for Non-Compliance

Failing to comply with federal or state retirement laws can result in:

• IRS penalties for late or incorrect plan filings.

• State fines for not participating in mandated programs.

• Lawsuits from employees if fiduciary duties are neglected.

For example, Wells Fargo faced a $145 million fine in 2023 for mismanaging 401(k) plans, highlighting the importance of compliance.

How Employers Can Choose the Right Retirement Plan

Assessing Business Size and Financial Capability

Small businesses should consider:

• Tax incentives available for plan setup.

• Administrative costs of maintaining a retirement plan.

• Long-term sustainability of offering benefits.

Understanding Employee Needs

Employees increasingly value financial wellness programs, including:

• Automatic enrollment in retirement plans.

• Financial literacy workshops to boost savings habits.

• Student loan assistance as an alternative benefit.

Partnering with a Retirement Plan Provider

Employers should seek financial advisors or third-party administrators (TPAs) to:

• Ensure compliance with ERISA and IRS rules.

• Optimize tax benefits.

• Educate employees on their retirement options.

Conclusion: Key Takeaways for Employers

Are retirement benefits required by law? Not at the federal level, but state-mandated programs are becoming more common.

If employers choose to offer plans, they must comply with ERISA and IRS regulations to avoid costly penalties.

The right retirement plan depends on company size, budget, and employee needs, making it essential for businesses to stay informed and compliant.

Navigating the complexities of employee benefits can be challenging, but you don’t have to do it alone.

LegalFix is here to help you succeed with employee benefits, ensuring compliance with federal and state laws while optimizing your offerings for long-term business growth.

Contact LegalFix today to get expert guidance on structuring your benefits program and securing your company’s future.